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Regulation of Banks

Regulation of Banks
                 Till 1993, regulatory as well as supervisory functions over commercial banks were performed by the Department of Banking Operations and Development (DBOD). Subsequently, a new Department of Banking Supervision (DBS) was set up to take over the supervisory functions relating to the commercial banks from DBOD. For dedicated and integrated supervision over all credit institutions, i.e., banks, development financial institutions and non-banking financial companies, the Board for Financial Supervision (BFS) was set up in November 1994 under the aegis of the Reserve Bank of India. For focussed attention in the area of supervision over non-banking finance companies, Department of Supervision was further bifurcated in August 1997 into Department of Banking Supervision (DBS) and Department of Non-Banking Supervision (DNBS). These Departments now look after supervision over commercial banks & development financial institutions and non-banking financial companies, respectively. Both these departments now function under the direction of the Board for Financial Supervision (BFS).
                On site inspection of banks is carried out on an annual basis. Besides the head office and controlling offices, certain specified branches are covered under inspection so as to ensure a minimum coverage of advances.
               The Annual Financial Inspection (AFI) focusses on statutorily mandated areas of solvency, liquidity and operational health of the bank. It is based on internationally adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality, management, earning, liquidity and system and control. While the compliance to the inspection findings is followed up in the usual course, the top management of the Reserve Bank addresses supervisory letters to the top management of the banks highlighting the major areas of supervisory concern that need immediate rectification, holds supervisory discussions and draws up an action plan, that can be monitored. All these are followed up vigorously. Indian commercial banks are rated as per supervisory rating model approved by the BFS which is based on ‘ CAMELS ‘ concept.
                  As part of the new supervisory strategy, a focussed off-site surveillance function was initiated in 1995 for domestic operations of banks. The primary objective of the off site surveillance is to monitor the financial health of banks between two on-site inspections, identifying banks which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action.
                   During December 1995 first tranche of off-site returns was introduced with five quarterly returns for all commercial banks operating in India and two half yearly returns one each on connected and related lending and profile of ownership, control and management for domestic banks. The second tranche of four quarterly returns for monitoring asset-liability management covering liquidity and interest rate risk for domestic currency and foreign currencies were introduced since June, 1999. The Reserve Bank intends to reduce this periodicity with effect from April 1,2000.

Key obligations for banks towards RBI

Banks are required to maintain a portion of their demand and time liabilities as cash reserves with the Reserve Bank. For this purpose, they need to maintain accounts with the Reserve Bank. They also need to keep accounts with the Reserve Bank for settling inter-bank obligations, such as, clearing transactions of individual bank customers who have their accounts with different banks or clearing money market transactions between two banks, buying and selling securities and foreign currencies.

In order to facilitate a smooth inter-bank transfer of funds, or to make payments and to receive funds on their behalf, banks need a common banker. By providing the facility of opening accounts for banks, the Reserve Bank becomes this common banker, known as ‘Banker to Banks’ function. The function is performed through the Deposit Accounts Department (DAD) at the Reserve Bank’s Regional offices. The Department of Government and Bank Accounts oversees this function and formulates policy and issues operational instructions to DAD.

The Reserve Bank continuously monitors operations of these accounts to ensure that defaults do not take place. Among other provisions, the Reserve Bank stipulates minimum balances to be maintained by banks in these accounts. Since banks need to settle transactions with each other occurring at various places in India, they are allowed to open accounts with different regional offices of the Reserve Bank. The Reserve Bank also facilitates remittance of funds from a bank’s surplus account at one location to its deficit account at another. Such transfers are electronically routed through a computerised system called e-Kuber. The computerisation of accounts at the Reserve Bank has greatly facilitated banks’ monitoring of their funds position in various accounts across different locations on a real-time basis.

In addition, the Reserve Bank has also introduced the Centralised Funds Management System (CFMS) to facilitate centralised funds enquiry and transfer of funds across DADs. This helps banks in their fund management as they can access information on their balances maintained across different DADs from a single location. Currently, 75 banks are using the system and all DADs are connected to the system. As Banker to Banks, the Reserve Bank provides short-term loans and advances to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes. These loans are provided against promissory notes and other collateral given by the banks.

As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.

How RBI protects the interests of the small depositors and common man?

Various government agencies have been put in place to safeguard the interests of investors and the general public through regulatory authorities. The Reserve Bank of India or the banker’s bank is the one which, perhaps, has the most impact on the life of normal people as it controls the purse strings of the banks and also indicates when loans need to get more expensive. Here we list a few that impacts your life directly.

  1. Monetary authority: That is, formulation, implementation and monitoring of the monetary policy. It also indicates to the banking system if there is a need to increase or decrease rates on home loans, personal loans etc through its various tools. The objective is to keep inflation under control while ensuring adequate flow of credit to productive sectors at affordable rates of interest.
  2. Regulator: It prescribes broad guidelines for proper functioning of the banking and financial system.

The objective is to provide smooth and affordable banking facilities to the public, while protecting the interests of investors and depositors and maintaining public confidence in the financial system. Within this realm, the RBI covers bank deposits, loans and advances, credit cards, bank accounts and various financial products offered by banks and non-banking financial companies.

  1. Foreign exchange: Manages foreign exchange remittances and dealings, to enable citizens to invest abroad within prescribed limits, receive gifts or remittances from overseas; procure forex for vacations and expenses etc.
  2. Issuer of currency: It issues fresh currency and exchanges or destroys currency and coins not fit for circulation, to give the public proper quality and quantity of currency notes and coins.
  3. Banker to the government: Issues various bonds and administers schemes like the Senior Citizens Deposit Scheme, Public Provident Fund on behalf of the government and controls the debt markets, providing the government much needed resources and investors a suitable investment avenue, by selling such bonds and instruments to investors who prefer government guaranteed debt instruments.

How can one approach the bank?

This can be done through the ‘Grievance Redressal’ mechanism under the Banking Ombudsman Scheme, where the aggrieved parties can approach the designated authority for redressal of their grievances against all banks in India.  These include among others:

  1. Credit cards complaints
  2. Excessive or unjustified service charges
  3. Non-acceptance of notes and coins
  4. Default on promises made by sales agents
  5. Refusal to open or close accounts or deposits
  6. Delays or defaults in delivery
  7. Foreign remittances

Complainants can file their complaints with the Banking Ombudsman Office. However, in case of credit card complaints, the application should be filed with the Banking Ombudsman having territorial jurisdiction over the billing address of the credit card holder and not the credit card issuer. However, consumers can only file complaints for grievances which have not been satisfactorily addressed by the banks after due correspondence.

They have the option to file their complaints in any form, including online, along with all the supporting documents. The banking ombudsman goes into the details of the case and tries to settle the complaint by conciliation and mediation between the parties involved. In case this is elusive, the Banking Ombudsman may pass an award against the bank or reject the complaint, depending on its merit.

Customers would be able to appeal to the RBI against the awards or rejection made by the Banking Ombudsman.

Para – banking Activities

Banks can undertake certain eligible financial services or activities either departmentally or by setting up subsidiaries is called Para Banking. We could also define Para banking activities as the activities which are done by a Bank apart from its normal day to day activities (like deposit, withdrawal etc.

Currency in India

Ancient Indians were the earliest issuers of coins in the world, along with the Chinese and Lydians (from the Middle East). The first Indian coins – punch marked coins called Puranas, Karshapanas or Pana – were minted in the 6th century BC by the Mahajanapadas (republic kingdoms) of ancient India. These included Gandhara, Kuntala, Kuru, Panchala, Shakya, Surasena, and Saurashtra.

The defining moment in the evolution of the rupee occurred when, after defeating Humayun, Sher Shah Suri set up a new civic and military administration. He issued a coin of silver, weighing 178 grains, which was termed the rupiya and  was divided into 40 copper pieces or paisa.  The silver coin remained in use during the remaining Mughal period.

In 1717 AD, the English obtained permission from Mughal emperor Farrukh Siyar to coin Mughal money at the Bombay Mint. The British gold coins were termed carolina, the silver coins angelina, the copper coins cupperoon, and the tin coins tinny.Paper money was first issued in British India in the 18th century, with the Bank of Hindostan, General Bank in Bengal and the Bengal Bank becoming the first banks in India to issue paper currency.

After the 1857 revolt, the British made the rupee the official currency of colonial India, with the head of King George VI replacing native designs on banknotes and coins.

In 1862, the Victoria portrait series of bank notes and coins were issued in honour of Queen Victoria and later, many emperors followed suit. For security reasons, the notes of this series were cut in half; one half was sent by post and upon confirmation of receipt, the other half was sent.

The Reserve Bank of India was formally set up in 1935 and was empowered to issue Government of India notes.  RBI also printed 10,000 rupee notes (the highest denomination RBI has ever printed in its history) that were later demonetised after independence.

After India became independent in 1947, India’s monetary system remained unchanged for a while, with 1 rupee consisting of 64 pice. The first banknote printed by independent India was a 1 rupee note.

On August 15, 1950, the new ‘anna system’ was introduced – the first coinage of the Republic of India. The British King’s portrait was replaced with the engraving of Ashoka’s Lion Capital of Sarnath, and the tiger on the 1 rupee coin was replaced with a corn sheaf. One rupee now consisted of 16 annas.

The 1955 Indian Coinage (Amendment) Act, which came into force on April 1, 1957, introduced a ‘decimal series’. The rupee was now divided into 100 paisainstead of 16 annas or 64 pice.The coins were initially called naye paise, meaning new paise, to distinguish them from the previous coins.

The Currency Department in RBI attends to the core statutory function of note and coin issue and currency management. This involves forecasting the demand for fresh notes and coins, placing the indent with four printing presses and mints, receiving supplies against those indents and distributing them through the 18 offices of the Bank, a wide network of currency chests, repositories and small coin depots. The Department also keeps an account of notes in circulation and also the stocks at RBI offices and currency chests.

Decimalization of Coinage

On August 15, 1950, the new ‘anna system’ was introduced – the first coinage of the Republic of India. The British King’s portrait was replaced with the engraving of Ashoka’s Lion Capital of Sarnath, and the tiger on the 1 rupee coin was replaced with a corn sheaf. One rupee now consisted of 16 annas.

The 1955 Indian Coinage (Amendment) Act, which came into force on April 1, 1957, introduced a ‘decimal series’. The rupee was now divided into 100 paisainstead of 16 annas or 64 pice.The coins were initially called naye paise, meaning new paise, to distinguish them from the previous coins.

In order to aid the blind in the country, each coin had distinctly different shapes – the round 1 naya paisa, scalloped edge 2 naya paisa, the square 5 naya paisa, and the scalloped edge 10 naya paisa.

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